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Chinese economy heating up in spite of itself

The China re-opening story got a significant boost yesterday with sharp rises in the pace of activity across the world’s second-biggest economy in the wake of the relaxation of President Xi’s harsh Covid restrictions in late December and early January.

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Financial markets – especially equities and commodities – have risen this year partly because of the promise of big gains to be had from the ending of the Covid zero policy and the return to ‘normal’ activity.

For Australian coal exporters, these surveys are good news because they presage rising demand for high quality coking and thermal coal over the next few months as Chinese demand for more energy grows as the pace of economic activity accelerates.

Tuesday saw the January activity surveys for the Chinese economy and they all showed a sharp recovery with some of the strongest rises in seven months, thanks to the decision to abandon the restrictions imposed by President Xi Jinping.

China’s official manufacturing purchasing managers’ survey saw the first expansion since October last year, according to the country’s National Bureau of Statistics.

China’s manufacturing activity for January came in at 50.1, above the 50-point threshold separating growth from contraction and sharply higher than the 47-point reading in depressed December.

Similarly, China’s non-manufacturing services which comprise of the services, catering and construction sectors, rose to 54.5 from 41.6 in December.

That helped the combined activity for the whole economy jump to 52.9 from the depressed 42.6 in December. This was the highest this index has been since last June.

All major measures moved into expansion territory with readings above 50 (which is the dividing line between expansion and contraction).

The surveys showed a sharp rise in domestic orders and a slower rate of fall in export orders.

The timing of the relaxation of the zero Covid policy was timed to allow Chinese consumers to spend heavily over the week-long Spring festival/Lunar New Year holidays.

Even though there were fears of more Covid outbreaks, the holidays saw reports of tens of millions of people travelling internationally as well as domestically and this seems to have lifted retail sales and other service sectors.

Zhao Qinghe, a senior statistician with the NBS, attributed the improvement in China’s vast manufacturing sector to the “gradual normalcy of production and life order and the implementation of the new Covid response of the Xi government”.

And even though there are no obvious links with the changed Covid policy, the relaxing of the ban on Australian coal imports seems to have been well-timed as well.

The policy changed emerged in January with reports the government was allowing several Chinese buyers to import coking and thermal coal.

Reuters this week reported that at least two cargoes of Australian coal will be imported into China in the next few days.

Reuters said About 72,000 tonnes of metallurgical (coking) coal was loaded on to the bulk carrier Magic Eclipse at Hay Point in Queensland (Where BHP/Mitsubishi Australia export coking coal) on January 23 and is expected to arrive at the southern Chinese city of Zhanjiang in Guangdong province next week.

Reuters said that China’s top steelmaker Baowu Group bought the cargo. Baowu is one of the four government-backed firms given permission from China’s state planner in early January to purchase Australian coal. The company has 12.25 million tonnes of steelmaking capacity at its Zhanjiang base, according to Reuters.

Another bulk vessel, the BBC Maryland, is carrying about 12,000 tonnes of thermal coal from Newcastle and heading to the eastern Chinese city of Changshu, Reuters reported. The cargo is scheduled to arrive on February 10 but it is not immediately clear who the buyer was. The size of that cargo suggests this is a trial cargo for a new buyer designed to check to see if it is worth buying.

China Energy Investment Corp purchased at least two cargoes of Australian coal, Reuters reported in early January. China’s local media reported that the other two firms given approval to buy Australian coal have also placed orders.

Coal traders will be paying attention to how easily the shipments pass customs for signs that the informal ban is truly over and in the hopes of sending more Australian coal to China, according to Reuters.

Even though Chinese coal (both coking and thermal coal) is being increased, demand is forecast to rise faster from the steel and power sectors, especially along the southern and central coasts of China as the country’s economy sees higher growth.

The stronger than expected official surveys of manufacturing and service sector activity shows that demand is recovering in much of the economy, so the pressures to import more Australian coal (favoured for its higher quality and lower pollutants) are expected to increase for the next few months.

Australian exporters are not trumpeting the coal sales in this country which suggests both sides are still feeling their way after the ban, imposed in mid-2020, was lifted in January.

February thermal coal was priced at $US266 a tonne yesterday in Newcastle, down more than $US100 a tonne from the first days of last month.

High quality Australian coking coal was priced around $US316 a tonne on Monday on the Singapore Exchange – up from around $US256 a tonne last November and $US296 a tonne at the start of January.

Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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